Protectionism is a political hot button, but outsourcing jobs benefits the economy in the long run.
Although the Internet has caused enormous upheaval in many industries, it hasn't overturned a guiding principle of prudent economic policy and good capitalism: Protectionist behavior by a country ultimately does more harm than good. Any short-term gain achieved by blocking imports is illusory and forces a country to forfeit long-term jobs and wealth creation.
History has shown this to be true, again and again.
The knowledge of this certainty, however, is being swept aside in the heat of an election year. We've seen this reaction before. In the 1992 presidential campaign, Ross Perot increased his profile by raising the specter of the "giant sucking sound" of jobs going to Mexico. Manufacturers would be driven out of the United States because of the North American Free Trade Agreement (NAFTA). Ross lost, NAFTA went on, and the sucking sound proved a figment of his imagination. Some jobs left, but more and better jobs were created in their wake.
This time the villain isn't Mexico, but India. With an eye on November's vote, politicians sense electoral points can be scored by fanning the fires of middle-class anxiety. The drumbeat for protectionism grows louder.
When President George W. Bush's Chairman of the Council of Economic Advisers, Professor N. Gregory Mankiw, had the temerity to suggest that so-called offshoring of jobs was a positive development, he was pilloried. In Indiana, Democratic governor Joseph E. Kernan rescinded an $8 million welfare-service contract that had been awarded to a company from India.
Even those typically supportive of freer trade are hedging their bets, suggesting this round of protectionism is somehow different and may be justified. Although everyone agrees that $29 DVD players from China are great, jobs such as computer programming are in a different league. They deserve special treatment because we want to keep that work here.
But the logic doesn't hold. We aren't exporting jobs. In the case of software, we're simply importing good, less expensive computer code. Software is no different from a DVD. If a company can make or purchase software written in India for far less money than if it were written here, then that's what it should do. It can't afford not to.
Corporations face unprecedented marketplace pressure courtesy of the Internet. This pressure is good, because competition makes for better and less costly products for the consumer. In response to this pressure, companies are restructuring themselves to seize every advantage the Internet can offer. Gone is the traditional, vertically integrated corporation that performs all functions in-house. Smart companies focus on what they do best and partner to do the rest, thereby capturing marketplace discipline at every step of production.
I call this new form of wealth creation the business web. In a business web, the time and cost of moving from an idea to execution is rapidly declining. In the traditional vertically integrated corporation, new ideas can languish because of the difficulty of mobilizing resources. Often, projects falter in large companies when employees are pressed into jobs unrelated to their skills because managers are instructed to "make do" with the workers on hand. The other option is to hire new employees qualified for a new project, but that is time-consuming and costly. Approvals must be sought, a reporting structure developed, workspace arranged, and so on.
But in a business web, projects can be reduced to bite-sized pieces and farmed out via the Internet to specialists around the world with virtually no additional cost. Knowledge value can be added to a product or service — through innovation, enhancement, cost reduction, or customization — at each step in its life cycle. A characteristic of today's best managers is their ability to deploy and integrate the output of specialists scattered around the world who will likely never meet.
If U.S. companies can access cheaper production inputs elsewhere — and this will increasingly be the case — then they should. If we don't let them, they'll become uncompetitive, and we'll all suffer a lower standard of living.
Take one small example, the personal computer. Most PCs today are built in China, Mexico, Korea, Singapore, and other countries where wages and other costs are cheaper. If U.S. companies such as IBM, Hewlett-Packard, and Dell were forced to manufacture their products in the United States, they'd be priced out of the world market. Because nobody would buy them, the next logical step in the illogical process would be protectionist measures to stop the import of more price-competitive PCs. This step would have the effect of making all other businesses less competitive, because they'd be paying more for their computers than other companies around the world. The call would go up for more protectionism. The vicious cycle would expand and accelerate.
In an economy where a growing number of goods and services are the result of digital collaboration, the Internet puts at our disposal the best and the brightest from around the world. Rather than blocking access to them, we should concentrate on weaving these elements into the products that stand head and shoulders above their competitors.
DON TAPSCOTT is the author of 10 books about technology and society, most recently (with David Ticoll) The Naked Corporation: How the Age of Transparency will Revolutionize Business (Free Press, 2003).